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|Subject: Re: Strategy comparison S&P500 vs. IUL [rev 1]||Date: 4/6/2013 3:33 PM|
|Author: sykesix||Number: 71753 of 73907|
Now, I know that most people will would be paying closer to the 15% than the 40%. But, in my opinion, if IULs have a role, it is for high net worth individuals - people who are already maxing out their tax-deferred savings options and saving additional money in non-retirement accounts. These people will likely remain in a high tax bracket after retirement, where marginal rates on income from IRA distributions can be 39%, and even long term capital gains will be 20%.
Taxes are a good question, and I think are about the last thing we need to look at to put this issue to bed. IULs have some tax advantages and we need to at least think about them, even if we can't calculate exactly what they might be.
However, I'm not quite sure I understand what you're saying. If we're assuming for a high income individual either strategy would take place outside an IRA (for the reasons you mentioned), then the S&P strategy withdrawals would be taxed at the long term capital gains rate, which is for our high income earner would be 23.8% next year (up from 15%).
23.8% is a lot bigger than the zero tax rate of the IUL withdrawals, but the outperformance of the S&P strategy so utterly crushes the IUL strategy that it doesn't matter. You are so vastly ahead of the IUL that the tax question simply don't affect the decision tree.
For a lower income earner (less than $450,000, married filing jointly--which is not a bad income!), the S&P withdrawals would be taxed 15% next year. Tax on the dividends I don't think will matter a whole lot because it is only 20% of 2.5%.
So, unless I'm missing something the IUL doesn't make sense for high income earners and definitely not for low income earners. Low income in this case being less than $450,000/year.
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